Greg Mankiw's Blog

Friday, September 30, 2011

Principle #4 in Action

In Chapter 1 of my favorite text, we learn that people respond to incentives. As this story remind us, bureaucrats are people too.

Managers in the Social Security Administration, struggling to handle a skyrocketing number of disability cases, had an unusual request for their workers this week: slow down.

Social Security judges and employees in Florida, Alabama, Colorado, Georgia, Tennessee, Ohio and Arizona were among those instructed to set aside disability cases this week, with the slowdown allowing managers to boost their performance numbers for the coming fiscal year, which starts Monday.

Top officials, in a bid to meet goals to win promotions or thousands of dollars in bonuses, directed many employees to refrain from issuing decisions on cases until next week, according to judges and union officials. This likely would delay benefits paid to thousands of Americans with pending applications, many of whom are financially needy and have waited for a government decision for more than a year.

The directive stemmed from a wrinkle in the federal calendar, in which this week fell between the federal government's 2011 and 2012 fiscal years. This happens every five or six years, as officials are allowed to count just 52 weeks in their calendar. Counting this week would make the current fiscal year 53 weeks long. That meant any applications for disability benefits completed between Monday and Friday wouldn't count toward the annual numerical targets set for Social Security judges or field offices.

Thursday, September 29, 2011

Left-Digit Bias

Chapter 22 of my favorite textbook discusses various ways in which individual decisionmaking deviates from standard notions of rationality. Here is a new one to me (from the NBER Digest):

In Heuristic Thinking and Limited Attention in the Car Market (NBER Working Paper No. 17030), authors Nicola Lacetera, Devin Pope, and Justin Sydnor focus on the used car market and ask whether it is affected by consumers exhibiting a heuristic, or short cut, known as left-digit bias: the tendency to focus on the left-most digit of a number while partially ignoring other digits.

Using data that come from wholesale auctions encompassing more than 22 million used car transactions, the authors document significant price drops at each 10,000-mile threshold from 10,000 to 100,000 miles, ranging from about $150 to $200. For example, cars with odometer values between 79,900 and 79,999 miles, on average, are sold for approximately $210 more than cars with odometer values between 80,000 and 80,100 miles, but for only $10 less than cars with odometer readings between 79,800 and 79,899.

Fred Bergsten on Net Exports

In today's NY Times, Fred says government policy should focus more on increasing net exports. He says a lot of wise things, especially regarding the need for better intellectual property protection abroad. One part of the article, however, puzzles me. He writes:

The artificially low value of the renminbi — it is 20 to 30 percent less than what it should be — amounts to a subsidy on Chinese exports and a tariff on imports from the United States and other countries.

Think about this for a moment. As I discussed in this old Times column, the way China affects the exchange rate is by buying dollars in foreign exchange markets and using them to buy dollar-denominated assets (such as Treasury bonds). Yet the exact same mechanism is at work whenever any foreigner invests in the United States. All capital flows into the US raise the value of the dollar in foreign exchange markets and make our exports less competitive. Does Fred object to all capital flows into the US? Would he prefer some degree of capital flight from the US because it would lower the value of the dollar and promote exports? That seems to be the logical implication of what he is saying, but I doubt that's what he intends to suggest. So I am puzzled.

Saturday, September 24, 2011

A Conversation with Robert Lucas

In today's Wall Street Journal. Unfortunately, I think you need a subscription for this link to work. (However, try Googling "Robert Lucas" in Google News, and I understand you can get around the paywall.)

Friday, September 23, 2011

Why I am not very worried about inflation just now

Click on graphic to enlarge.

Several people have asked me in recent days if the Fed's aggressive attempts to get the economy going will lead to galloping inflation to go along with our weak economic growth. It is possible that this might occur down the road, of course, but I don't see it happening just now. The slack labor market has kept growth in nominal wages low, and labor represents a large fraction of a typical firm's costs. A persistent inflation problem is unlikely to develop until labor costs start rising significantly. Notice in the graph above that the period of stagflation during the 1970s is well apparent in the nominal wage data. The same thing is not happening now. This is one reason I think the Fed is on the right track worrying more about the weak economy than about inflationary threats.

Thursday, September 22, 2011

Kotlikoff on the Corporate Tax

Wednesday, September 21, 2011

Nobel Predictions

Tuesday, September 20, 2011

The Progressivity of the Tax System

With all the rhetoric floating around regarding the "Buffett rule," it might be worth trying extra hard to keep an eye on the facts. Here is the progressivity of the current tax system, according to the Tax Policy Center. If you can remember only one fact, make it this one: The middle class (middle quintile) pays 14.1 percent of its income in federal taxes, while the rich (top tenth of one percent of the population) pay 30.4 percent.

Sunday, September 18, 2011

Taylor on the Fed's Mandate

The President's New Tax Reform Proposal

Disappointing, in my humble opinion, for reasons I discussed in this Times column. But not to worry: There is no chance it will become law in this congress. The proposal is about politics, not policy.

If the president were serious about tax reform, he would give his full-throated endorsement to the kind of tax reform ideas advanced by the Bowles-Simpson commission that he appointed, as I discussed in this column.

Wednesday, September 14, 2011

Hayek and Keynes

Monday, September 12, 2011

Krugman on Barro

Paul's comment on Robert's latest column confuses me. Paul shows a graph establishing that the investment share of GDP is procyclical, as if that refutes Robert's viewpoint about what ails the economy. But that fact is hardly a surprise. As I put it recently, "the most volatile component of G.D.P. over the business cycle is spending on investment goods." Moreover, I know Robert well enough, having been his colleague for about a quarter century, to know that he knows the macroeconomic time series as well as anyone.

The problem that Paul glosses over is that correlation does not imply causation. Paul appears to jump to the conclusion that this correlation establishes that the the business cycle is the driving force behind investment spending. But it could just as easily be the opposite (or a third factor driving both). I am completely confused as to why Paul thinks this graph establishes much of anything at all.

I should note, as an aside, that Robert is the second most cited living economist. That fact does not imply that everything he says is correct. (And indeed Robert and I disagree often in Harvard seminars.) But it does suggest that one should not be so glib in summarily rejecting his point of view.

A Plan for Zero Unemployment

There were 14m unemployed workers in August. The $447b stimulus package could be used to generate a check of almost $32,000 to each and every one of them. As a condition of receiving that check, they would be asked to work at some organization, for profit or nonprofit, for one year. These jobs would last just as long as the stimulus package and some of them would no doubt turn into real jobs. Isn't this a plan everyone could support?

Paul Samuelson on Social Security

A friend calls to my attention this quotation from Paul Samuelson. It is from a Newsweek column written in 1967, but it has some modern relevance. Of course, at the time, Samuelson was not focused on the large unfunded liabilities we now face.

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population.

More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

Social Security is squarely based on what has been called the eighth wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.

Thursday, September 08, 2011

Warren Buffett's Taxes, again

I was disappointed to hear the President tonight raise the canard about Warren Buffett's allegedly low tax rate. The story is, at the very least, deeply misleading. I addressed the issue several years ago in this column.

Sunday, September 04, 2011

Something for Nothing

Reflections of a Former Student

Ed Balls is a prominent British politician. He is now the shadow chancellor, which means he is the chief economics spokesman for the opposition Labour Party. Long ago, however, he was a student of mine, as he notes in this essay on the current global economy.

Thursday, September 01, 2011

Theory versus Practice

Ten Principles of Economics, in Limericks

About Me

I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.